Effective pricing of products that are made available for sale is often a complicated task. In order to maximize profits, not only must revenue be optimized, but also the costs of inventory must be taken into account. One strategy used is to periodically reduce the price of the products or services, effecting a markdown, to encourage sales of the products or services. The amount of the markdown is often set by a sales agent who has experience in the market for the products or services and can, using his or her experience and intuition, determine the timing and amount of markdowns.
In particular, the sale of seasonal products poses a high financial risk for merchants. Each seasonal product can be assigned a specific sales period. When high-fashion and fashion products are involved, the merchant wants to have as little remaining stock as possible at the end of the sales period, as it will be difficult to sell this merchandise even with markdowns. In this case, larger remaining stocks translate to higher losses. In addition to fashion products, such as pink raincoats, this also applies to other products, such as computer hardware.
For less “fashionable” products, the risk may be lower because merchants can store any remaining stock and then try to sell it at the normal price again in the same season of the next year. Because storing inventories is expensive, however, merchants will generally prefer to sell their merchandise by the end of the regular sales period.
Merchants use markdowns to ensure that the merchandise is sold out as completely as possible by the end of a season. Markdowns are price reductions or buyer's incentives aimed at promoting the sale of certain products. Of course, markdowns reduce the gross margin, which means the revenue merchants earn for selling the merchandise is less than originally planned. Merchants usually plan a certain budget for markdowns that must not be exceeded. Accordingly, markdowns are applied restrictively in retail, which once again increases the risk of remaining stocks at the end of the season.
Therefore, an important goal in managing seasonal merchandise is to limit markdowns to a minimum and to apply them at the best suitable time, while ensuring that nearly all the merchandise is sold by the end of the season. Another important goal in managing seasonal merchandise is to accurately and efficiently plan sales of products for use during various strategic and operational planning activities such as assortment planning.